Chipotle Is 'Not Likely A Traditional Activist Playbook'

After market close on September 6, Pershing Square Holdings Ltd PSH filed a Schedule 13D on Chipotle Mexican Grill, Inc. CMG, disclosing a 9.9 percent stake, with the majority in forward purchase contracts.

Barclays’ Jeffrey A. Bernstein maintains an Equal-Weight rating on Chipotle, with a price target of $395.

What The Activist Wants

Pershing Square indicated it intends to “engage in discussions” with Chipotle’s board, management and other interested parties regarding all aspects of the business.

“We are not surprised to see an ‘activist’ in CMG. With that said, we don’t expect a traditional restaurant activist playbook. Instead, we expect the focus to be on returning the brand to former industry leadership using past proven growth strategies,” the analyst stated.

Related Link: Morgan Stanley On Chipotle: "No Quick Spreadsheet Math To Create Shareholder Value"

Chipotle’s shares have dropped 45 percent from the highs seen in the summer of 2015. However, the initial selloff had been driven by slowing comps and a lack of visibility into a re-acceleration entering 2016.

What The Analyst Expects

According to the Barclays report, “While investors want to believe in the ultimate brand recovery, management acknowledged such has been ‘challenging & frustrating’ with visibility limited on the timeframe, and such by no means a certainty.”

Bernstein pointed out that management has been struggling to come up with a proven strategy; and in the absence of a full sales recovery, restaurant margins, unit growth and ultimately EPS growth would remain muted.

At time of writing, Chipotle was up over 5.75 percent in Wednesday's pre-market, seen at $438.01.

Full ratings data available on Benzinga Pro.